Mid-sized upstream planters will likely perform better

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Mid-sized upstream planters will likely report good numbers in upcoming results season due to higher FFB output and CPO selling prices (on q-o-q basis) and higher CPO selling prices (which will more than mitigate lower FFB output on y-o-y basis), analysts say. — AFP photo

KUCHING: The decoupling between share prices of plantation companies and crude palm oil (CPO) price, in analysts’ view, could be due to several reasons including investors’ concern on CPO sustaining at high level over the longer term, among others.

But analysts believe that mid-sized upstream players will likely see better share price performances in near term, supported by decent valuations.

The research arm of Hong Leong Investment Bank Bhd (HLIB Research) recapped that CPO price has surged by more than 70 per cent from its low of RM2,022 per tonne in mid-May 2020, due to concerns on edible oil supply tightness (arising from La Nina phenomenon and labour shortfall in Malaysia) and aggressive restocking activities (particularly among the major edible oil consuming countries, as a result of low stockpile level).

“However, the surge in CPO price was not entirely reflected in KL Plantation Index, which only increased by a much smaller magnitude of less than 20 per cent during the same period,” HLIB Research said in its plantation sector update.

“The decoupling between share prices of plantation companies and CPO price, in our view, could be due to several reasons including investors’ concern on CPO sustaining at high level over the longer term (particularly, when output eventually recovers), high valuation of listed planters in Malaysia versus their neighbouring peers and investors’ growing emphasis on environmental, social and governance (ESG), which may have resulted in them shying away from the sector despite earnings prospects improving.”

Despite share prices of plantation companies under its coverage have recovered since March 18, 2020 (when KLCI was at its low, due to the MCO), HLIB Research noted that certain plantation companies (in particular, the mid-sized upstream players such as Hap Seng Plantations Bhd, IJM Plantations Bhd and TSH Resources Bhd) are still trading at notably lower than their share prices in early January-2020 (when CPO price was hovering at RM3,000 per tonne level vis-…-vis approximately RM3,500 per tonne currently).

In HLIB Research’s view, mid-sized upstream players will likely see better share price performances in near term, supported by decent valuations. Despite having factored in a much lower CPO price assumption of RM2,700 per tonne for 2021 to 2022, the research arm noted that mid-sized are trading at financial year 2021-2022 (FY21-22) price earnings (P/E) of less than 20-fold.

Additionally, the research arm highlighted that better share price performances may be supported by strong earnings in coming results season.

It explained that mid-sized upstream planters will likely report good numbers in upcoming results season due to higher FFB output and CPO selling prices (on q-o-q basis) and higher CPO selling prices (which will more than mitigate lower FFB output on y-o-y basis).

“To note, average CPO price in fourth quarter of 2020 (4Q20) was 22.2 to 35.5 per cent higher quarter on quarter (q-o-q) and year on year (y-o-y), respectively.”

All in, HLIB Research maintained its CPO price projection of RM2,700 per tonne (for 2021 to 2022) and ‘neutral’ stance on the sector, as the research arm believed current high CPO price will not sustain over the longer term.

“Among the plantation stocks under our coverage, small-to-mid cap plantation players will likely outperform the big cap players, due to their emphasis on upstream plantation segment, which tends to performs better vis-…-vis the integrated players amidst rising CPO prices).”